FOREX-dollar tracks Treasury yields lower as Fed remains dovish

Author: Rae Wee

SINGAPORE, Nov 2 (Reuters)The dollar fell broadly on Thursday, tracking a drop in U.S. Treasury yields as markets grew more confident that the Federal Reserve has ended its aggressive monetary policy tightening cycle after leaving rates unchanged.

The Fed left interest rates on hold on Wednesday stable as was widely expected as policy makers sought to determine whether financial conditions could be tight enough to control inflation.

But Fed Chairman Jerome Powell acknowledged that recent market-driven rises in Treasury yields, home mortgage rates and other funding costs could have their own impact on the economy if they persist.

The decision lifted spirits Wall Streetwhich spilled over into the Asian day and slightly supported the risk-sensitive Australian and New Zealand dollars.

Aussies AUD=D3 rose 0.5% to a three-week high of $0.6426, while kiwi NZD=D3 similarly, it jumped more than 0.5% to hit a two-week high of $0.58825.

The dollar fell sharply along with US Treasury yields, which touched multi-week lows in early Asian trade. OUR/

“It appears to us that the FOMC is now in pause mode, albeit in a hawkish way, rather than simply on pause,” Wells Fargo chief economist Jay Bryson said. “That means we think the bar for further rate hikes is higher now than it was a few months ago.”

US Treasury Biennial Return US2YT=RRwhich typically reflects expectations for short-term interest rates, fell to a near two-month low of 4.9250% on Thursday, while the benchmark 10-year yield US10YT=YY fell to a more than two-week low of 4.7070%.

Against the dollar, the euro EUR = EBS rose 0.18% to $1.0589.

US dollar index = USD fell 0.11% to 106.34.

Traders also gained further confidence that US rates may have peaked after data showed US manufacturing contracted sharply in October, although separate data pointed to still resilient work a market that is likely to see the Fed hold rates at restrictive levels for longer.

“We will probably have to see some weakening of the labor market before the inflation target is reached,” said Lon Erickson, portfolio manager at Thornburg Investment Management.

“That may take some time to play out and is one of the reasons why we’re likely to see higher rates for longer.”

Market prices point to a nearly 15% chance the Fed could start cutting rates as early as next March, according to CME’s FedWatch tool, compared with about a 10% chance a week ago.

The dollar’s move lower only brought some respite, though it remained on the weaker side of 150 to the dollar.

The Japanese currency was last at 150.44 per dollar, after falling to a one-year low of 151.74 per dollar in the week as a result of the Bank of Japan’s (BOJ) monetary policy. decision.

Investors were still trying to digest the consequences of the central bank’s gradual actions tune in to its controversial bond yield control policy – a move that sent Japan’s bond market and currency diverging in response.

“This almost looks like the end of the line for YCC, but the extent to which the BOJ will intervene in the JGB market should 10-year yields rise above 1% is still unclear,” said Tom Kenny, senior international economist at ANZ. .

“We believe the BOJ will be content to let longer-duration yields move higher in an orderly fashion, and that intervention is likely to occur if moves are volatile.”

Elsewhere, the pound GBP = D3 rose 0.35% to $1.2192 ahead of the Bank of England’s rate decision later Thursday, where expectation is for the central bank to keep rates unchanged.

World exchange rates

(Reporting by Rae Wee. Editing by Sam Holmes)

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